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Book building is a systematic process of generating, capturing, and recording investor demand for shares.Usually, the issuer appoints a major investment bank to act as a major securities underwriter or bookrunner.
Issuer is a legal entity that develops, registers and sells securities for the purpose of financing its operations.
In investment banking, a bookrunner is usually the main underwriter or lead-manager/arranger/coordinator in equity, debt, or hybrid securities issuances. The bookrunner usually syndicates with other investment banks in order to lower its risk. The bookrunner is listed first among all underwriters participating in the issuance. When more than one bookrunner manages a security issuance, the parties are referred to as "joint bookrunners".
Book building is an alternative method of making a public issue in which applications are accepted from large buyers such as financial institutions, corporations or high net-worth individuals, almost on firm allotment basis, instead of asking them to apply in public offer. Book building is a relatively new option for issues of securities, the first guidelines of which were issued on October 12, 1995 and have been revised from time to time since. Book building is a method of issuing shares based on a floor price which is indicated before the opening of the bidding process.
The "book" is the off-market collation of investor demand by the bookrunner and is confidential to the bookrunner, issuer, and underwriter. Where shares are acquired, or transferred via a bookbuild, the transfer occurs off-market, and the transfer is not guaranteed by an exchange's clearing house. Where an underwriter has been appointed, the underwriter bears the risk of non-payment by an acquirer or non-delivery by the seller.
Book building is a common practice in developed countries and has made inroads into emerging markets as well. Bids may be submitted online, but the book is maintained off-market by the bookrunner and bids are confidential to the bookrunner. Unlike a public issue, the book building route will see a minimum number of applications and large order size per application. The price at which new shares are issued is determined after the book is closed at the discretion of the bookrunner in consultation with the issuer. Generally, bidding is by invitation only to high-net-worth clients of the bookrunner and, if any, lead manager, or co-manager. Generally, securities laws require additional disclosure requirements to be met if the issue is to be offered to all investors. Consequently, participation in a book build may be limited to certain classes of investors. If retail clients are invited to bid, retail bidders are generally required to bid at the final price, which is unknown at the time of the bid, due to the impracticability of collecting multiple price point bids from each retail client. Although bidding is by invitation, the issuer and bookrunner retain discretion to give some bidders a greater allocation of their bids than other investors. Typically, large institutional bidders receive preference over smaller retail bidders, by receiving a greater allocation as a proportion of their initial bid. All bookbuilding is conducted "off-market" and most stock exchanges have rules that require that on-market trading be halted during the bookbuilding process.
The key differences between acquiring shares via a bookbuild (conducted off-market) and trading (conducted on-market) are:
The bookrunner collects bids from investors at various prices, between the floor price and the cap price. Bids can be revised by the bidder before the book closes. The process aims at tapping both wholesale and retail investors. The final issue price is not determined until the end of the process when the book has closed. After the close of the book building period, the bookrunner evaluates the collected bids on the basis of certain evaluation criteria and sets the final issue price.
If demand is high enough, the book can be oversubscribed. In these cases the greenshoe option is triggered.
Book building is essentially a process used by companies raising capital through public offerings, both initial public offers (IPOs) or follow-on public offers (FPOs), to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.
When a company wants to raise money, it plans on offering its stock to the public. This typically takes place through either an IPO or FPO. The book building process helps determine the value of the security. Once a company determines it wants to have an IPO, it will then contact a bookrunner or a lead manager. The bookrunner will determine the price range at which it is willing to sell the stock. The bookrunner will then send out the draft prospectus to potential investors. Generally, the issue stays open for five days. At the end of the five days, the bookrunner determines the demand of the stock for its given price range. Once the cost of the stock has been determined, then the issuing company can decide how to divide its stock at the determined price to its bidders.
Before Facebook's IPO, the book building process was used to determine how much the stock was worth before it was sold to the public. Morgan Stanley was the lead investor for Facebook's IPO. Initially, the stock was thought to be determined between $28 and $35 a share. The week before the stock was sold, the demand for the stock was sufficient to increase the price between $34 to $38 a share. Once the stock was offered, Morgan Stanley tried to prevent the stock from falling below $38 a share in order to prevent the IPO from being considered a failure. Since Facebook stock initially had a high demand, but this demand fell and its price consequently fell, it was considered that Facebook was overvalued when it was sold at its initial public offering.
Facebook, Inc. is an American online social media and social networking service company based in Menlo Park, California. It was founded by Mark Zuckerberg, along with fellow Harvard College students and roommates Eduardo Saverin, Andrew McCollum, Dustin Moskovitz and Chris Hughes. It is considered one of the Big Four technology companies along with Amazon, Apple, and Google.
Morgan Stanley is an American multinational investment bank and financial services company headquartered at 1585 Broadway in the Morgan Stanley Building, Midtown Manhattan, New York City. With offices in more than 42 countries and more than 55,000 employees, the firm's clients include corporations, governments, institutions and individuals. Morgan Stanley ranked No. 67 in the 2018 Fortune 500 list of the largest United States corporations by total revenue.
The primary market is the part of the capital market that deals with the issuance and sale of equity-backed securities to investors directly by the issuer. Investor buy securities that were never traded before. Primary markets create long term instruments through which corporate entities raise funds from the capital market. It is also known as the New Issue Market (NIM).
In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds.
Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to institutional investors and usually also retail (individual) investors; an IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges. Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company. Initial public offerings can be used: to raise new equity capital for the company concerned; to monetize the investments of private shareholders such as company founders or private equity investors; and to enable easy trading of existing holdings or future capital raising by becoming publicly traded enterprises.
The Australian Securities Exchange is Australia's primary securities exchange. It is owned by the Australian Securities Exchange Ltd, or ASX Limited, an Australian public company. Prior to December 2006 it was known as the Australian Stock Exchange, which was formed on 1 April 1987, incorporated under legislation of the Australian Parliament as an amalgamation of the six state securities exchanges. It merged with the Sydney Futures Exchange in 2006.
London Stock Exchange is a stock exchange located in the City of London, England. As of April 2018, London Stock Exchange had a market capitalisation of US$4.59 trillion. It was founded in 1571, making it one of the oldest exchanges in the world. Its current premises are situated in Paternoster Square close to St Paul's Cathedral in the City of London. It is part of London Stock Exchange Group (LSEG).
A Dutch auction is one of several similar kinds of auctions. Most commonly, it means an auction in which the auctioneer begins with a high asking price, and lowers it until some participant accepts the price, or it reaches a predetermined reserve price. This has also been called a clock auction or open-outcry descending-price auction. This type of auction is good for auctioning goods quickly, since a sale never requires more than one bid. Strategically, it's similar to a first-price sealed-bid auction.
Underwriting services are provided by some large financial institutions, such as banks, or insurance or investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability arising from such guarantee. An underwriting arrangement may be created in a number of situations including insurance, issue of securities in a public offering, and bank lending, among others. The person or institution that agrees to sell a minimum number of securities of the company for commission is called the underwriter.
Formally known as an "over-allotment option", a greenshoe is the term commonly used to describe a special arrangement in a share offering, for example an initial public offering (IPO), which enables the investment bank representing the underwriters to support the share price after the offering without putting their own capital at risk. The option is codified as a provision in the underwriting agreement between the leading underwriter - the lead manager - and the issuer or vendor.
A rights issue or rights offer is a dividend of subscription rights to buy additional securities in a company made to the company's existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a non-dilutive(can be dilutive) pro rata way to raise capital. Rights issues are typically sold via a prospectus or prospectus supplement. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the issuer at a specified price within a subscription period. In a public company, a rights issue is a form of public offering. Sometimes Right issue can give privileges to people like director, employees those are having some ownership in company to buy the issues.
Stock dilution, also known as equity dilution, is the decrease in existing shareholders’ ownership of a company as a result of the company issuing new equity. New equity increases the total shares outstanding which has a dilutive effect on the ownership percentage of existing shareholders. This increase in the number of shares outstanding can result from a primary market offering, employees exercising stock options, or by issuance or conversion of convertible bonds, preferred shares or warrants into stock. This dilution can shift fundamental positions of the stock such as ownership percentage, voting control, earnings per share, and the value of individual shares.
A red herring prospectus, as a first or preliminary prospectus, is a document submitted by a company (issuer) as part of a public offering of securities. Most frequently associated with an initial public offering (IPO), this document, like the previously submitted Form S-1 registration statement, must be filed with the Securities and Exchange Commission (SEC).
A special purpose acquisition company (SPAC) is a type of investment fund that allows public stock market investors to invest in private equity type transactions, particularly leveraged buyouts. SPACs are shell or blank-check companies that have no operations but go public with the intention of merging with or acquiring a company with the proceeds of the SPAC's initial public offering (IPO).
A reverse convertible security or convertible security is a short-term note linked to an underlying stock. The security offers a steady stream of income due to the payment of a high coupon rate. In addition, at maturity the owner will receive either 100% of the par value or, if the stock value falls, a predetermined number of shares of the underlying stock. In the context of structured product, a reverse convertible can be linked to an equity index or a basket of indices. In such case, the capital repayment at maturity is cash settled, either 100% of principal, or less if the underlying index falls conditional on barrier is hit in the case of barrier reverse convertibles.
A reverse greenshoe is a special provision in an IPO prospectus, which allows underwriters to sell shares back to the issuer. If a 'regular' greenshoe is, in fact, a call option written by the issuer for the underwriters, a reverse greenshoe is a put option.
A French auction is a multiple-price auction used for pricing initial public offerings.
Indian Depository Receipt (IDR) is a financial instrument denominated in Indian Rupees in the form of a depository receipt. The IDR is a specific Indian version of the similar global depository receipts.
ASBA is a process developed by the India's Stock Market Regulator SEBI for applying to IPO. In ASBA, an IPO applicant's account doesn't get debited until shares are allotted to them.
IPO underpricing is the increase in stock value from the initial offering price to the first-day closing price. Many believe that underpriced IPOs leave money on the table for corporations, but some believe that underpricing is inevitable. Investors state that underpricing signals high interest to the market which increases the demand. On the other hand, overpriced stocks will drop long-term as the price stabilizes so underpricing may keep the issuers safe from investor litigation.
The social networking company Facebook held its initial public offering (IPO) on Friday, May 18, 2012. The IPO was the biggest in technology and one of the biggest in Internet history, with a peak market capitalization of over $104 billion.
Following is a glossary of stock market terms.